By Deborah Levine and William L. Watts, MarketWatch
NEW YORK (MarketWatch) — The U.S. dollar briefly pared gains against the euro and fell more against the Japanese yen on Monday after Standard & Poor’s lowered its outlook on the U.S. government’s long-term AAA rating to negative from stable.
The greenback bounced back, as earlier worries about European sovereign debt, after a strong showing by an anti-euro party in Finland’s national elections and rising fears of a Greek debt restructuring, kept Europe’s 17-nation shared currency under heavy pressure.
The dollar index DXY +1.09% , which measures the greenback against a basket of six currencies, rose to 75.369 from 74.867 in late North American trading Friday.
The euro dropped to $1.4271 from $1.4429 Friday. See real-time currency quotes and tools.
The British pound GBPUSD -0.6805% slipped 0.3% versus the dollar to $1.6277.
Standard & Poor’s said the outlook change was due to the very large budget deficits and rising government indebtedness in the U.S., and the unclear path to addressing those issues. Read more on U.S. rating outlook.
Long-term Treasury bond prices fell, sending yields higher.
“The initial FX market reaction has been to weaken the dollar but this is not so obvious,” said Charles Diebel, head of market strategy at Lloyds TSB. “Yes, the rate argument would suggest that this is valid but if the U.S. administration really ‘bit the bullet’ then confidence in the unit could actually increase. After all, fiscal issues are a developed world issue, not just the U.S.”
Hence, the dollar resumed its gains against the euro, more heavily weighed by rising bond yields on the euro-zone’s periphery, including Spain. Read more about Finland and Greece weighing on the European bond market.
Sunday’s national election in Finland saw string support for the anti-euro True Finns party, which raised fears that the Finnish parliament could block or hamper a pending bailout package for Portugal.
Adam Cole, global head of forex strategy at RBC, said the True Finns are unlikely to derail an expected €80 billion ($114.6 billion) bailout for Portugal, but said horse trading in coming weeks over the formation of a new coalition government could leave the euro vulnerable to headlines.
“Indications that the new coalition government will include the True Finns or, to a lesser extent, the Social Democrats [are] likely to be knee-jerk euro-negative,” Cole said. “Conversely, signals from the Center Party that it would consider being part of the coalition would likely be knee-jerk euro- positive.”
Greece’s finance ministry on Monday denied a Greek news report that the government asked the European Union and International Monetary Fund to begin talks on restructuring debt. The story nonetheless helped fan worries of a potential restructuring.
“The euro’s strength this year has been a waiting game on how long the markets can shrug off fears about euro-zone default. This waiting game stops with the inevitable scenario of Greek debt restructuring, which will cause collateral damage to Europe’s banking system and contagion across Europe’s most vulnerable sovereign borrowers,” wrote strategists at Brown Brothers Harriman, in a research note.
Speculation over the possibility of a Greek restructuring and the Finnish election results were credited with boosting borrowing costs at a Spanish T-bill auction Monday and with contributing to renewed upward pressure on peripheral euro-zone bond yields.
Safe-haven signals
Together, the U.S. rating worries and European peripheral problems sent strong signals among currency pairs often looked to as an indication of investors’ willingness to take on more risky assets.
The Japanese yen and Swiss franc, both traditionally considered havens of safety, rose sharply.
The U.S. dollar USDYEN -1.1062% fell to ¥82.57 from ¥83.58 Friday.
The greenback pared gains against the Swiss franc USDSWF +0.6048% , to gain just 0.3% recently.
The Australian dollar AUDUSD -0.8719% fell 0.4% versus the U.S. dollar to $1.0489 as overall risk appetite appeared to wane.
Over the weekend, China raised its bank reserve requirement for the fourth time this year. Read more about the rise in China’s reserve requirement.
“The Australian dollar appears to have weathered the latest installment of Chinese tightening fairly well. Generally speaking, commodity prices have not shown any adverse effects to anticipation of further Chinese rate hikes, which is allowing the Australia dollar to better absorb tightening moves by China than was previously the case,” Tim Waterer, senior FX dealer at CMC Markets, said in a note to clients.
